Critical illness cover

A serious illness, such as cancer or heart attack, affects one-in-four women and one-in-five men before retirement age.

Critical illness insurance is designed to ease the financial pressures by paying a tax-free lump sum if you become seriously ill or totally disabled. You must normally survive at least one month after becoming critically ill, before the policy will pay out.

What it covers

Originally known as 'dread disease cover', critical illness insurance pays benefits on the diagnosis of certain specified critical illnesses. The range of diseases covered has increased to more than 30, though contracts differ from one company to another.

All policies should cover seven core conditions. These are cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. They will also pay out if a policyholder becomes permanently disabled as a result of injury or illness.

But not all conditions are necessarily covered. Earlier this year the
Association of British Insurers introduced a set of best practice guidelines.

The new rules include clarification on when policies will pay out if a claimant suffers 'total permanent disability'. All policies automatically include reduced cover for children but the new rules spell out when it will not apply - for example, if the condition was present at birth.

In May 2003, the ABI introduced other measures. These included conditions such as non-invasive skin cancers, and less advanced cases of prostate cancer. Tumours that have not yet invaded the organ or tissue, and lymphoma or Kaposi's sarcoma in the presence of HIV are excluded.

There are also more restrictive conditions for heart attacks. There has to be evidence of typical chest pain, or changes in the electrocardiogram (ECG), for example, if a claim is to be successful. Cardiac conditions, such as angina, will not be covered.

For single people with no dependents, critical illness cover that pays off the mortgage is more important than having life cover, as it means you have fewer bills or a lump sum to play with if you are very unwell.

But it can also be useful if you are part of a couple. It provides a welcome financial boost at a time of emotional stress and financial hardship.

This is Money has revealed dozens of cases of people let down by critical illness cover, and we've intervened in many cases and won justice and payouts for our readers. See the latest stories in our special channel:

Most providers allow people to take out cover between the ages of 17 and 70. It can be for a specified number of years - as long as your mortgage, for example - or for life. Or you can just take out a policy and keep it going for as long as you choose. When you buy a policy there will normally be a waiting period - typically three months - before you can make a claim.

If you want to take out cover, you should do it as soon as possible. The rise in claims and the cost of advances in medical technology have led many insurers to cut back on the conditions they cover, or to impose restrictions on what counts as a critical illness, while many have raised premiums by up to 50%. Premiums are expected to continue to rise as medical technology develops.

Getting covered

To take out critical illness cover you will need to complete a proposal form. You will be asked if members of your family have suffered major illnesses in the past. If they have, your policy may be rated, which means you will pay higher premiums or will not be covered for certain conditions.

You may need a medical before being accepted for cover, but this does not necessarily mean you will have to pay higher premiums. You pay more if you are a smoker.

Not all illnesses are covered. Some of the most common exclusions include HIV/Aids, drug misuse, self-inflicted injury and criminal acts.

IMPORTANT: Be honest about your medical history

It is vitally important that you are honest and give the insurer the most complete information you can when applying for health related insurance.

If you need to claim - i.e. the time you actually want the insurance to work - the insurer will trawl through your medical history for details that you neglected to tell them when you applied. If they find such information, they could refuse your claim.

It might make your insurance more expensive, but in the long run it could the difference between getting a pay out or nothing.

Making your choice

Choosing the right plan can be tricky. There are more than 60 providers offering 200 versions of critical illness insurance.

Policies vary widely in the illnesses they cover so don't simply opt for the cheapest plan because it will probably offer limited cover. On the other hand, don't go for the policy that covers everything from anthrax to yellow fever -it may not be the most appropriate. Policies that appear to cover every serious illness imaginable are sometimes merely an excuse for the insurer to charge higher premiums.

Things to look out for

The Association of British Insurers (ABI) can provide a list of companies that offer CII policies, you can contact them on 020 7600 3333. You should also follow these pointers:

• Read the small print so you are sure what you are buying. Make sure you know exactly what is and is not covered.

• You want a plan that says it will pay if you cannot follow your own occupation, not any occupation.

• Also check whether premiums are fixed or can be increased by the insurance company every few years after a review. Fixed premiums - also known as guaranteed - may be higher to begin with, but could prove cheaper in the long run, which is why, unfortunately, many insurers are withdrawing these. If you do find a policy offering guaranteed premiums it may be worth taking out.

• If you have children, look for a policy that will cover them, in the event they become critically ill or seriously disabled. A growing number of insurers now cover children as standard.

• All insurers should give you what is known as a key features document, which will give you all the important information about that policy, for example, what conditions are covered and those that are excluded. You can use this to compare policies from different companies.

Buying critical illness cover

The sale of critical illness cover often accompanies an important life event, such as buying a house or having children.

When borrowers take out a mortgage, the lender may well try to sell critical illness cover, as well as life assurance or income protection, on top of the mortgage.

It will rarely pay to accept the insurance they are offering. It is unlikely that the seller will be able to offer you the best of what is on offer from the insurance market, and there is no reason to assume it will be priced competitively.

It is quick and easy to seek out a policy yourself if you believe you need the insurance. Insurance brokers, available online and over the phone, will be able to search the whole of the insurance market and quote you a price.

There is no upfront fee for this but the broker will take a commission from the insurer for passing on your business.

An alternative, and potentially cheaper, option is to use a 'discount broker'. These discount brokers will offer to repay the bulk of the commission they claim back to you via cheaper monthly premiums. Instead, you pay a one off fixed fee that usually works out cheaper.

The process has been operating in the life assurance market for some time and is considered the cheapest way to buy that insurance. Read our guide on buying life assurance.

The one potential downside to using a discount broker is that they operate on an 'execution only' basis. This means that they cannot give you advice in which policy to take out.

Traditional brokers boast that they will ensure you application is properly completed, including important tax and trust arrangements if the need arises, and that they can help in the pursuit of future claims.

But if you decide these are things you are happy to decide for yourself, then a discount broker will be cheaper.

Making a claim

Typically, the benefit is paid as a one-off lump sum and is tax-free. The maximum payable varies between providers but usually ranges between £100,000 and £250,000.

Payment is generally made within 28 days of a serious illness being diagnosed though in the event of permanent disability it will take longer - usually six months to a year.

Critical illness insurance is different to Income Protection (also known as permanent health insurance), which pays a regular income in the event of long-term sickness or injury (see guide links below).

There are a number of instances where payments under one plan would not be allowed under the other. For example, if you suffer from severe back pain you will not be covered under a critical illness policy, but probably will qualify for payment under the terms of a Income Protection plan.

In contrast, a minor stroke would probably qualify for a critical illness payment but would not necessarily be eligible under an income protection scheme.

Using your payout

How you use the benefits is entirely up to you. They may be used to pay off a mortgage or clear outstanding debts. They can also help to pay for childcare or home help.

Crucially, benefits from a critical illness policy give you time to come to terms with your condition and decide what changes you want or need to make to your life.

Benefits are payable only to survivors so the shorter the survival time required before the policy pays out, the better. Some insurance companies will pay as long as you survive a critical illness for a minimum of 15 days. However, policies that combine critical illness and life cover may be bought.

If you change your mind

Most policies should have a 14-day cooling off period when you can change your mind. If you contact the insurer and cancel the policy in this time you should receive a full refund of your first premium.